Inflation Report
August 2010
Prospects for inflation
Chart 5.1 GDP projection based on market interest rate
expectations and £200 billion asset purchases
The fan chart depicts the probability of various outcomes for GDP growth. It has been conditioned on the assumption that the stock of purchased assets financed by the issuance of central bank
reserves remains at £200 billion throughout the forecast period. To the left of the first vertical dashed line, the distribution reflects the likelihood of revisions to the data over the past; to the right, it
reflects uncertainty over the evolution of GDP growth in the future. If economic circumstances identical to today’s were to prevail on 100 occasions, the MPC’s best collective judgement is that the
mature estimate of GDP growth would lie within the darkest central band on only 10 of those occasions. The fan chart is constructed so that outturns are also expected to lie within each pair of the
lighter green areas on 10 occasions. In any particular quarter of the forecast period, GDP is therefore expected to lie somewhere within the fan on 90 out of 100 occasions. And on the remaining 10
out of 100 occasions GDP growth can fall anywhere outside the green area of the fan chart. Over the forecast period, this has been depicted by the light grey background. In any quarter of the
forecast period, the probability mass in each pair of the identically coloured bands sums to 10%. The distribution of that 10% between the bands above and below the central projection varies
according to the skew at each quarter, with the distribution given by the ratio of the width of the bands below the central projection to the bands above it. In Chart 5.1, the ratios of the probabilities in
the lower bands to those in the upper bands are approximately 6:4 at Years 1, 2 and 3. See the box on page 39 of the November 2007 Inflation Report for a fuller description of the fan chart and
what it represents. The second dashed line is drawn at the two-year point of the projection.
Chart 5.2 Projected probabilities
of GDP growth in 2011 Q3
(central 90% of the distribution)(a)
Chart 5.3 Projected probabilities of
GDP growth in 2012 Q3 (central
90% of the distribution)(a)
(a) Charts 5.2 and 5.3 represent cross-sections of the GDP growth fan chart in 2011 Q3 and 2012 Q3 for the market interest rate projection. They have been conditioned on the assumption that the
stocks of purchased assets financed by the issuance of central bank reserves remain at £200 billion throughout the forecast period. The coloured bands in Charts 5.2 and 5.3 have a similar
interpretation to those on the fan charts. Like the fan charts, they portray the central 90% of the probability distribution. If economic circumstances identical to today’s were to prevail on 100
occasions, the MPC’s best collective judgement is that GDP growth in 2011 Q3 and 2012 Q3 would lie somewhere within the range covered by the histogram on 90 occasions. GDP growth
would lie outside the range covered by the histogram on 10 out of 100 occasions. The grey outlines in Charts 5.2 and 5.3 represent the corresponding cross-sections of the May 2010 Inflation
Report fan chart, which was conditioned on the same assumption about the stock of purchased assets financed by the issuance of central bank reserves.
(b) Average probability within each band; the figures on the y-axis indicate the probability of growth being within ±0.05 percentage points of any given growth rate, specified to one decimal place.
As the heights of identically coloured bars on either side of the central projection are the same, the ratio of the probability contained in the bars below the central projection, to the probability in
the bars above it, is given by the ratio of the width of those bars.
Chart 5.4 Projection of the level of GDP based on market
interest rate expectations and £200 billion asset purchases
Chained-volume measure (reference year 2006). See the footnote to Chart 5.1 for details of the assumptions underlying the projection for GDP growth. The width of this fan over the past
has been calibrated to be consistent with the four-quarter growth fan chart, under the assumption that revisions to quarterly growth are independent of the revisions to previous quarters.
Over the forecast, the mean and modal paths for the level of GDP are consistent with Chart 5.1. So the skews for the level fan chart have been constructed from the skews in the
four-quarter growth fan chart at the one, two and three-year horizons. This calibration also takes account of the likely path dependency of the economy, where, for example, it is judged that
shocks to GDP growth in one quarter will continue to have some effect on GDP growth in successive quarters. This assumption of path dependency serves to widen the fan chart.
Chart 5.5 Frequency distribution of GDP growth based on
market interest rate expectations and £200 billion asset
purchases(a)
(a)
These figures are derived from the same distribution as Chart 5.1. They represent the probabilities that the MPC assigns to GDP growth lying within a particular range at a
specified time in the future.
Chart 5.6 CPI inflation projection
based on market interest rate
expectations and £200 billion
asset purchases
Chart 5.7 CPI inflation projection in
May based on market interest rate
expectations and £200 billion asset
purchases
Charts 5.6 and 5.7 depict the probability of various outcomes for CPI inflation in the future. They have been conditioned on the assumption that the stock of purchased assets financed by the
issuance of central bank reserves remains at £200 billion throughout the forecast period. If economic circumstances identical to today’s were to prevail on 100 occasions, the MPC’s best collective
judgement is that inflation in any particular quarter would lie within the darkest central band on only 10 of those occasions. The fan charts are constructed so that outturns of inflation are also
expected to lie within each pair of the lighter red areas on 10 occasions. In any particular quarter of the forecast period, inflation is therefore expected to lie somewhere within the fans on 90 out of
100 occasions. And on the remaining 10 out of 100 occasions inflation can fall anywhere outside the red area of the fan chart. Over the forecast period, this has been depicted by the light grey
background. In any quarter of the forecast period, the probability mass in each pair of the identically coloured bands sums to 10%. The distribution of that 10% between the bands above and below
the central projection varies according to the skew at each quarter, with the distribution given by the ratio of the width of the bands below the central projection to the bands above it. In Chart 5.6,
the ratios of the probabilities in the lower bands to those in the upper bands are approximately 4:6 in Years 2 and 3; the upward skew is slightly smaller in Year 1. Those skews are larger than those
in Chart 5.7. See the box on pages 48–49 of the May 2002 Inflation Report for a fuller description of the fan chart and what it represents. The dashed lines are drawn at the respective two-year
points.
Chart 5.8 Assessed probability inflation will be above
target
The August and May swathes in this chart are derived from the same distributions as Charts 5.6 and 5.7 respectively. They indicate the assessed probability of inflation being above target in each
quarter of the forecast period. The width of the swathe at each point in time corresponds to the width of the band of the fan chart in which the target falls in that quarter, or, if the target falls outside
the coloured area of the fan chart, the width of the band closest to the target. The bands in the fan chart illustrate the MPC’s best collective judgement that inflation will fall within a given range. The
swathes in Chart 5.8 show the probability within the entire band of the corresponding fan chart of inflation being close to target; the swathes should not therefore be interpreted as a confidence
interval.
Chart 5.9 Projected probabilities
of CPI inflation outturns in
2011 Q3 (central 90% of the
distribution)(a)
Chart 5.10 Projected probabilities
of CPI inflation outturns in
2012 Q3 (central 90% of the
distribution)(a)
(a) Charts 5.9 and 5.10 represent cross-sections of the CPI inflation fan chart in 2011 Q3 and 2012 Q3 for the market interest rate projection. They have been conditioned on the assumption that
the stock of purchased assets financed by the issuance of central bank reserves remains at £200 billion throughout the forecast period. The coloured bands in Charts 5.9 and 5.10 have a similar
interpretation to those on the fan charts. Like the fan charts, they portray the central 90% of the probability distribution. If economic circumstances identical to today’s were to prevail on 100
occasions, the MPC’s best collective judgement is that inflation in 2011 Q3 and 2012 Q3 would lie somewhere within the range covered by the histogram on 90 occasions. Inflation would lie
outside the range covered by the histogram on 10 out of 100 occasions. The grey outlines in Charts 5.9 and 5.10 represent the corresponding cross-sections of the May 2010 Inflation Report
fan chart, which was conditioned on the same assumption about the stock of purchased assets financed by the issuance of central bank reserves.
(b) Average probability within each band; the figures on the y-axis indicate the probability of inflation being within ±0.05 percentage points of any given inflation rate, specified to one decimal place.
As the heights of identically coloured bars on either side of the central projection are the same, the ratio of the probability contained in the bars below the central projection, to the probability in
the bars above it, is given by the ratio of the width of those bars.
Chart 5.11 Frequency distribution of CPI inflation based
on market interest rate expectations and £200 billion asset
purchases(a)
(a)
.
These figures are derived from the same distribution as Chart 5.6. They represent the probabilities that the MPC assigns to CPI inflation lying within a particular
range at a specified time in the future.
Chart 5.12 GDP projection based on constant nominal
interest rates at 0.5% and £200 billion asset purchases
See footnote to Chart 5.1.
Chart 5.13 CPI inflation projection based on constant
nominal interest rates at 0.5% and £200 billion asset
purchases
See footnote to Chart 5.6.
Financial and energy market
assumptions
Table 1 Conditioning path for Bank Rate implied by forward
market interest rates(a)
Per cent
2010
2011
Q3(b) Q4
2012
2013
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
2.4
August
0.5
0.5
0.6
0.7
0.8
1.0
1.2
1.4
1.6
1.9
2.1
2.2
May
0.5
0.6
0.8
1.1
1.4
1.7
2.0
2.3
2.6
2.8
3.0
3.2
(a) The data are fifteen working day averages of one-day forward rates to 4 August and 7 May 2010 respectively. The curves are based on overnight index swap (OIS) rates.
(b) August figure for 2010 Q3 is an average of realised spot rates to 4 August, and forward rates thereafter.
The MPC’s recent
forecasting record
Chart A CPI inflation
(a) Based on market interest rate expectations and the assumption that the stock of purchased assets reached £125 billion and remained there throughout the forecast period. See
footnote to Chart 5.6 for information on how to interpret the fan chart.
Chart B GDP
(a) Based on market interest rate expectations and the assumption that the stock of purchased assets reached £125 billion and remained there throughout the forecast period. See
footnote to Chart 5.1 for information on how to interpret the fan chart.
(b) Revisions to early estimates of GDP growth account for the gap between the red and black lines prior to the fan chart.
Chart C CPI components(a)
(a) The chart contains data for 69 CPI components. Food and non-alcoholic beverages, fuels and lubricants, and electricity, gas and other fuels have been excluded. Due to data
availability, the average inflation rates for five components are calculated since December 2000, while one component is calculated since December 2001. Data are non seasonally
adjusted.
Other forecasters’ expectations
Chart A Distribution of CPI inflation central projections
one year ahead
Sources: Projections of 20 outside forecasters as of 26 April 2010 and 21 outside forecasters as of 22 July 2010.
(a) A projection that is on the boundary of these ranges is classified in the higher bucket. For example, a 1.8% projection is included within the 1.8% to 2.2% bucket.
Chart B Distribution of GDP growth central projections(a)
Source: Projections of outside forecasters as of 22 July 2010.
(a) For 2011 Q3 there were 21 forecasts. For 2013 Q3 there were 18 forecasts.
(b) A projection that is on the boundary of these ranges is classified in the higher bucket. For example, a 2.0% projection is included within the 2.0% to 2.5% bucket.
Table 1 Averages of other forecasters’ central projections(a)
2011 Q3
2012 Q3
2013 Q3
CPI inflation(b)
2.4
1.8
1.9
GDP growth(c)
2.0
2.3
2.5
Bank Rate (per cent)
1.2
2.1
3.2
81.9
82.5
83.9
Sterling ERI(d)
Source: Projections of outside forecasters as of 22 July 2010.
(a) For 2011 Q3, there were 21 forecasts for CPI inflation, GDP growth and Bank Rate and 17 for the sterling ERI. For 2012 Q3 and 2013 Q3, there were 18 forecasts for CPI inflation, GDP
growth and Bank Rate and 15 for the sterling ERI.
(b) Twelve-month rate.
(c) Four-quarter percentage change.
(d) Where necessary, responses were adjusted to take account of the difference between the old and new ERI measures, based on the comparative outturns for 2006 Q1.
Table 2 Other forecasters’ probability distributions for CPI
inflation and GDP growth(a)
CPI inflation
Probability, per cent
Range:
<0%
0–1%
1–1.5%
1.5–2%
2–2.5%
2.5–3%
>3%
2011 Q3
2
5
12
20
24
20
18
2012 Q3
4
10
18
27
23
13
6
2013 Q3
3
9
15
26
25
14
8
GDP growth
Probability, per cent
Range:
<-1%
-1–0%
0–1%
1–2%
2–3%
>3%
2011 Q3
3
6
14
29
36
13
2012 Q3
3
6
12
24
34
21
2013 Q3
3
7
12
22
31
26
Source: Projections of outside forecasters as of 22 July 2010.
(a) For 2011 Q3, 21 forecasters provided the Bank with their assessment of the likelihood of twelve-month CPI inflation and four-quarter GDP growth falling in the ranges shown above; for
2012 Q3 and 2013 Q3, 18 forecasters provided assessments for CPI and GDP. The table shows the average probabilities across respondents. Rows may not sum to 100 due to rounding.